Delaware Court Of Chancery Declines To Dismiss Derivative Claims, Finding Wrongful Refusal Of Demand Adequately Pleaded
On October 29, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to dismiss derivative claims for breach of fiduciary duties brought by stockholders of BioDelivery Sciences International, Inc. (the “Company”). Drachman v. BioDelivery Scis. Int’l, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021). Plaintiffs alleged that the board improperly adopted two amendments to the Company’s certificate of incorporation. Plaintiffs made a pre-suit demand on the board requesting that it deem the amendments ineffective and indicating they would otherwise commence litigation. The board responded by noting that it had determined the demand was “without merit.” The Court held that plaintiffs adequately pleaded wrongful refusal because the allegations raised a reasonable doubt as to the good faith of the board in “rebuffing” the demand.
According to the complaint, at the Company’s annual stockholder meeting, the board proposed two amendments to its certificate of incorporation: (i) to declassify the board; and (ii) to change the director voting standard from a plurality to a “majority of the votes cast.” In advance of the meeting, the Company’s proxy statement explained that the amendments would need to be approved by the affirmative vote of a majority of the shares. Although each amendment secured a majority of the votes cast, neither reached the threshold majority of those shares entitled to vote. Nevertheless, the board treated the amendments as adopted by filing them with the Delaware Secretary of State and implementing them.
In their pre-suit demand, plaintiffs allegedly challenged the amendments under Delaware General Corporation Law Section 242(b), 8 Del. C. § 242(b), which requires the affirmative vote of “a majority of the outstanding stock entitled to vote thereon” to amend a certificate of incorporation. After plaintiffs filed suit against the Company and the board, including for the alleged violation of Section 242(b), the Company mooted the issue in large part by securing a majority vote of the shares to ratify the challenged amendments. Plaintiffs then filed an amended complaint asserting derivative breach of fiduciary duty claims.
The Court explained that when a stockholder elects to make a demand before filing suit, that is a concession that a majority of the board is independent and disinterested, and plaintiffs face a “high hurdle” in pleading wrongful refusal. Nevertheless, the Court found that the complaint sufficiently alleged that the demand “made plain that the proposals did not receive the number of votes required” and yet—“rather than acknowledge its mistake and take prompt corrective action”—the board instead gave the demand the “back of the hand.” The Court acknowledged that it “may well be” that the board “acted in good faith and was simply misinformed,” but explained that it must draw reasonable inferences in favor of plaintiffs.